Wed, 28 Aug 2013
Mediocre growth certainly brings its own set of complications, but it can also be more sustainable, less inflationary, and less wasteful, says Morningstar's Bob Johnson.
Jason Stipp: I'm Jason Stipp for Morningstar. One of the pain points coming out of the financial recession has been stubbornly slow growth. But is slow growth an entirely bad thing? Here to answer that question is Morningstar's Bob Johnson, our director of economic analysis.
Thanks for joining me, Bob.
Bob Johnson: Great to be here.
Stipp: A report came out recently by NBER saying that they expect slow growth to stick around for a while. Where are we right now with growth? What is the average? What have we seen recently?
Bob Johnson: In the post-World War II era, the average GDP growth rate here in the United States has been about 3.2%, and right now I'm thinking 2013, as an example, will be roughly between 1.5% and 2% GDP growth, depending on how you measure it. The potential could be for half the usual rate, and some people might claim that that's the recession and, yes, it partly is. … One other metric that I saw, and I haven't gone back to be able to check the data, but I've heard one commentator mention that if you look at the GDP growth rate over a five-year block of time, that this is one of the slowest-growth-rate periods except maybe in the 1930s when we were coming out of the Great Depression.
Stipp: It's been painfully slow. Certainly part of it was due to the recovery from the financial crisis. NBER says, though, that we should get used to slower growth. It's probably going to stick around for some secular reasons. What are some of the reasons they're saying, "get used to it"?
Johnson: One of the things they talk about is just the whole demographic situation, and certainly we've all heard, for many years, about the aging baby boomers and so forth. Now, as many of them retire and leave the workforce--they're very productive workers and now they're leaving and there are fewer [people] there to replace them--we're actually going to have a shrinking working-age population in a year or two, and that's going to certainly weigh on … overall GDP growth.
Stipp: We've also seen higher-education levels start to top out or peak, so we're not necessarily educating more people than we were before.
Johnson: Absolutely. For a while we were improving: More people got high school completion, more people got college every year as we went through time. But those data points have really stalled out, kind of dramatically, and their contention is that with the rest of the world getting more and more educated and us peaking out our [education] levels, that the U.S. may lose out just a little bit on the educational front.
Stipp: Another big topic in political spheres is income inequality. No matter what you think about it, there are some economic implications.
Johnson: Yes. You can always talk about the cause and how bad it is, but the income inequality has gotten worse. More of the money and more of the growth has gone to the very top of the income curve, and the bad news is that those people have a bigger propensity to save all their money and less to go out and spend it. They more want to protect what they have, and so as more growth and income accrue to the people at the top, it's worse than if it accrues to the people at the bottom that spend every dollar that they get.
So, unfortunately, the income inequality has been partially behind the slowing growth. That [trend has] been under way, by the way, since the 1980s.
Stipp: So a bigger portion of the money that's out there could be deemed discretionary, because it's held by a smaller number of people.
Stipp: What about globalization? That could be contributing to growth in other parts of the world, but it's not necessarily a good thing for our growth rate just right here.
Johnson: For the U.S. growth rate, certainly there is a lot of labor available throughout the world that we're just beginning to learn how to utilize, and unfortunately, that will put pressure on the U.S. growth rates. Especially as anything that takes a lot of labor intensity moves offshore, that will weigh. I'm not quite as pessimistic as [NBER is] on that aspect of their report. Globalization certainly will help bring down prices, but I don't think that it's all a bad thing for the U.S. economy.
Stipp: We're also facing some other regulations. For example, environmental regulations; we want to make sure that we balance what's going on with the environment, but that can hold growth back, obviously, if you have to abide by the rules.
Johnson: We've got lot of environmental issues coming up that we're going to have to decide on. Right now we're getting a little bit of a free pass with the shale gas. But we're going to have issues about how much coal to burn, what type of controls we should put on it. And frankly the regulation just isn't in the oil and gas field. It's also in the financial sector, where more and more controls are beginning to weigh on the growth of that very important sector.
Stipp: Then lastly, one of the big challenges as far as economic growth is the deleveraging that we're seeing--not only folks paying off their loans and getting out of debt as individuals, but also corporate deleveraging that we've seen for the last several years.
Johnson: I think that's behind an awful lot of the lower growth that we've seen recently. It may become less of a big deal in the next decade or two, but right now it's pretty big deal.
Mortgage debt is by itself down about 10%, so certainly that has been bringing overall growth rates down. And now we've got the government finally getting its act together and seeing a little bit of fiscal tightening there, and as their spending comes in, you've got that double whammy going on of decreased lending to either one of those parties. Without lending, you tend to get grow slower.
Stipp: So a number of headwinds are suggesting that we'll see growth at least moderate. There could, of course, be some surprise factors in there that contribute to growth in the years ahead. But certainly, at least we know these things will be pressures on growth.
But you say that slower growth isn't entirely a bad thing. There can be some positives to a growth rate that's more moderate. Let's talk about some of those. You say, first of all, less waste in a slow-growth environment.
Johnson: When you're growing rapidly, you tend to hire more people with overtime, you're more careless about how you do things: "Oh, I'm growing; I want to keep that growth rate going. I'll do anything to do it." In North Dakota, when they find oil up there, they flare the natural gas because the oil is the real thing that they're after. They haven't got the pipelines to it yet. Oh, well, we're not going to wait. We're going to do this and get it now while we can.
Same thing with China and some of their plants, [which are] very, very inefficient, but, boy, we need that growth, and so we do the equivalent of flaring over there as well. So we waste a lot of resources when we grow fast.
Stipp: When we have a slower growth rate, it's usually less volatile, so that means better visibility and that can help with business planning.
Johnson: When you don't know whether you're going to get 6% growth or minus 2% or plus 2%--and we've had volatile quarters like that--it's very hard for a business to plan. I think the one thing that happens with slow growth, it tends to be steadier, and it's easier to predict and plan for. Again, that avoids waste and unneeded, inefficient actions.
Stipp: Also the amount of capital that's needed or the amount of debt that companies or people will take on will start to moderate if you see slower growth.
Johnson: It's actually a combination of two things that go together, in fact. If you have lower inflation and lower growth, why do businesses need to borrow more money? Well, they need to borrow money for growth, so they can buy more capital and more things to go forward. In a slower growth environment--I'm not saying cut off all of it--but you tend to have less need for capital, normal working capital and inventory type of things. Certainly that creates less demand and will keep a lid on interest rates.
Stipp: You mentioned inflation there. That can be the thorn in the side of any fast-growing economy. If you have a more moderate growth rate, inflation probably won't be as severe.
Johnson: We've got live data here in front of us. China's growth rate has slowed from 10%-12% to 7%-8%, and lo and behold: commodity, oil, and food, some of the things that they are major importers in, the price inflation has gone away. So, lower growth probably means less inflation. We aren't all scrambling for the same stuff, so I think that's also very good news.
Stipp: Something else I think we've seen play out in real time is sustainability. So, the recovery that we've been in has lasted for several years now, and it's partially because we didn't have explosive growth; we had a more sustainable growth rate.
Johnson: [In past recessions] they shut down the auto industry, they shut down the housing industry basically, and then you come booming back and you have two or three quarters of 5%-6% growth, and then you hit a wall. Like I've said many times, we've had 10 recessions since World War II; five of them would have already been over, the recoveries from those recessions, would have been over by now compared to the length of this recovery.
Stipp: Lastly, you say, the fact is, because we're having slower growth, it might not be a bad match for the actual labor force that's going to be coming of age and coming into the workforce. It's just smaller than it was before.
Johnson: Right. The number of people between the ages of 22 and 62 in the U.S. is actually going to begin shrinking in the next couple of years.
Stipp: So slower growth has some positive effects as far as sustainability and the things we've discussed, but it's not obviously entirely good news. People are bemoaning slower growth for good reasons as well. The first thing, you say, is that it can make it harder to get out of the debt that you do have if you are seeing slower growth.
Johnson: One of the premier ways to get out of debt, whether it's government debt or individual debt, your income or your taxation or whatever grows with natural growth in the economy plus inflation. But now we've got, as I mentioned, more limited inflation and slower growth, and that's going to be really hard on debtholders.
Stipp: The other thing that we've seen play out in the labor market is that it's really going to be very hard to get all the workers that lost jobs back to work, because we're just not seeing the growth rates that we need at least for the labor force that we've got right now.
Johnson: I think that's where we're at. We're still a couple of million behind where we were at the peak back in 2008-2009 in terms of employment. So, with slower growth rates, it's going to be hard to put them all back to work. I think once we get there, we've got this shrinking workforce, but for the next couple of years we've certainly got some pain.
Stipp: If we're not seeing rapid growth in a lot of different areas, that could mean less mobility. So, folks who are put out of a job in one area that has slow or no growth, there are not a lot of other places where they can look that are seeing rapid growth where they could become employed.
Johnson: Right, exactly. You don't have the situation where you're going to have somebody, say, in the printing industry, which is going away quickly, to move into an Internet company. Well, that becomes a little less probable if you've got slower growth. What goes with that is, if you haven't got this dire need to get more capacity, that's also one of the drivers for innovation, and sometimes maybe slower growth might not encourage innovation as much as it has in the last several years.
Stipp: So, on balance, Bob, if you could pick the kind of growth rate, as an economist, that you think is the most beneficial for an economy, what kind of growth would you like to see? What's high-quality growth?
Johnson: I think it's 2%, maybe 2.5%. I don't think anything much over 3% makes sense anymore, and I think 2% looks like a little bit of a stretch here in the short run. But I think that's the number that balances the need for growth and people to move, and the mobility and innovation, and yet doesn't really stir up the need for inflation and workers that we don't have.
Stipp: Great insight and context as always, Bob. Thanks for joining me.
Johnson: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.